14th May 2013

Paying Attention to Observation Theory: A Conversation on finance, networks and observation theory

Monday May 27th 13:30-16:30 at IOA (Kilen,K4.74), organized by IOA and the Copenhagen Markets and Valuations Group

The seminar is free and open for participation, but it is expected that participants have read the circulated material. To assist, please register with alh.ioa@cbs.dk and you will receive the readings.

“You can observe a lot just by watching.”  — Yogi Berra

This seminar continues an ongoing conversation between Elena Esposito (Università di Modena e Reggio Emilia) and David Stark (Columbia University) on observation theory, social networks and the recent social studies of finance. The first installment of this dialogue is happening in a forthcoming issue of Sociologica that includes Esposito´s article “Economic circularities and second-order observation: the reality of ratings” and Stark´s review essay “Observing Finance as a Network of Observations” which also draws on Stark´s most recent work on “Attention Networks” in finance.  In this seminar, we are using these recent documents as raw material to continue this dialogue. You are invited to join us to try to think together about whether combining the insights provided by network economic sociology, the anthropology of market devices and performativity, and social systems theory can improve our empirical grasp of finance markets today.


Jose Ossandon: Introduction to the seminar

David Stark: Observing Finance as a Network of Observations: comment on Esposito

Elena Esposito: A reply to the comment

— Break —

Christian Frankel: Remarks to the conversation

Open discussion


Elena Esposito (Università di Modena e Reggio Emilia): Economic circularities and second-­‐order observation: the reality of ratings, Sociologica (forthcoming)

Abstract: Can observers observe the economy from outside? Recent developments in economic sociology tend to blur the classic distinction and combination of economy and society and to move to a condition in which the observer (each observer) is inside the society he describes. The behavior of financial actors can be analyzed combining two concepts with a long tradition and many implications: beauty contest and moral hazard – and can then be translated into the terms and the tradition of observation theory. Keynes’ beauty contest can be interpreted as a systematic recognition of second-order observation: financial operators observe primarily other observers and what they observe. This observation produces particular circularities – first of all the insoluble problem of moral hazard, which reproduces in the field of finance Merton’s famous model of self- defeating/self-fulfilling prophecies. If finance is second-order observation, however, its movements cannot be explained by reference to the world, but rather to observation and its structures: the reality reference of finance is increasingly provided by ratings, which offer information not on how the world is, but on what the others observe. The spread of ratings in recent decades and the doubts about their reliability are related in the article to the generalized move of modern society to second-order observation, which produces specific problems and specific puzzles, but also structures and constraints.

David Stark (Columbia University): Observing Finance as a Network of Observations: comment on Esposito, Sociologica (forthcoming)

Abstract: This essay contributes to observation theory by commenting on Esposito’s paper, “Economic circularities and second-­‐order observation: the reality of ratings.” The key question of that paper is summarized as: How does one calculate in the Keynesian third degree (attempting to ascertain what the average opinion considers as the average opinion) under conditions of diabolical circularity (when uncertainty about the future is generated by attempts to predict the future)? Esposito answers that ratings provide a fixed point of reference not because they are accurate but because they are highly visible. The second half of the paper is itself a second-­‐order observation. It uses another viewpoint (that of observation theory) to reinterpret my earlier ethnographic and network analytic research on finance.

Matteo Prato (University of Lugano), David Stark (Columbia University). Attention Networks: A Two-Mode Network View on Valuation (manuscript)  Paying Attention to Observation Theory: A Conversation on finance, networks and observation theory

Abstract. When multiple actors allocate their attention across multiple issues, they create an attention network. We leverage the multiple ties that comprise such an attention network to argue that how competitors interpret a given market situation depends not only on information about that situation but also on the portfolio of other situations to which they pay attention. Specifically, we hypothesize that the more two competitors assess a given situation vis-à-vis a more similar portfolio of other situations, the more they assess that issue similarly. It is so, we argue, because i) competitors who pay attention to the same problems are more likely to make similar cognitive associations and consequently come to more similar solutions on a given problem, and ii) competitors are more likely to adapt their interpretations on the basis of the assessments made by the competitors with whom their attention patterns intersect more frequently. We exploit the two-mode (agents-issues) dynamic structure of these observational networks to study the social and temporal aspects of financial analysts’ valuations in markets from 1993-2011. Our findings show that two analysts form more similar earnings estimates about a given firm if they come to that assessment while paying attention to a more similar portfolio of other firms. Our analysis further demonstrates that analysts’ estimates of the focal firm are influenced by views that cycle through closed triads.